On a swing through Latin America last week, Premier Li Keqiang of China wooed his hosts with potentially big deals. But Latin leaders shouldn’t let yuan fever blind them to their need to establish a more balanced relationship with China, one of their most important economic partners.
Li’s trip to Brazil, Chile, Colombia and Peru builds on the vision that Chinese President Xi Jinping laid out in January, when he pledged that Chinese direct investment in Latin America would reach $250 billion over the next decade, and predicted that annual bilateral trade could hit $500 billion. In the past 12 months, Chinese companies announced 37 percent more deals than they had in the previous year. China has already eclipsed the U.S. as the top destination for South American exports. And it’s now Latin America’s biggest annual creditor.
What’s wrong with closer economic ties to one of the world’s most dynamic economies? In principle, nothing. In reality, however, the pattern of Latin America’s dealings with China poses problems. Over the past decade, for instance, China has bought a lot of soybeans, wheat, iron ore and oil, but not a lot of the region’s manufactured exports (less than 2 percent, in fact), and China’s investments have been mostly in the extractive sectors. So exports to China have produced fewer jobs (and less skill development) than exports to other regions. Moreover, Chinese trade and investment have focused on products and projects that exact a heavy environmental toll in deforestation, greenhouse gases and water usage.
Li’s stop in Brazil was meant to signal a shift from this approach. He spoke of big-ticket infrastructure projects, investments in finance and manufacturing, purchases of iron ore carriers, orders for Embraer jets, and lifting China’s ban on imports of Brazilian beef. And Brazilian President Dilma Rousseff, for one, had good reason to talk up the deals — worth as much as $53 billion, her administration said — faced as she is with a stagnant economy, political scandal and a fiscal mess.
But much of this was just talk. For starters, the Chinese put the planned investment total in Brazil at just $27 billion. Some of the deals repackage earlier agreements; others are just memorandums of understanding. And if past experience is any guide, quite a few will wither on the Amazonian vine.
That might be a blessing in disguise. The much-hyped prospect of a railroad from Brazil to Peru — last week’s agreement was to have a feasibility study by 2016 — would go through some of the region’s most environmentally sensitive areas. And though Latin America badly needs infrastructure, the conditioning of projects on the use of Chinese workers and Chinese equipment would reduce their positive impact.
A real danger is that strapped Latin American governments will make deals they come to regret. Venezuela is all but addicted to Chinese loans-for-oil, which have not only enabled its political repression and economic mismanagement, but also locked up a significant portion of its future oil output. Likewise in Ecuador, Chinese companies now control about 90 percent of total oil production. Shut out from international capital markets, a dysfunctional Argentina has dipped deep into China’s money bowl, reciprocating with no-bid infrastructure projects and looser visa requirements for Chinese workers. Such growing Chinese economic clout is stirring more local resentment.
Certainly China and Latin America share an interest in strengthening economic ties. Latin America can’t close its infrastructure gap without Chinese money. China needs Latin America’s commodities. And any dreams that commodity-driven Latin American economies can reinvent themselves as powerhouses of manufactured exports are all but dead.
That said, both sides can take steps to make their relationship healthier and more sustainable. If Brazil really wants more Chinese investment in manufacturing, it should reform its tax regime and labor laws and improve its educational system to churn out more engineers. But China’s protectionist trade policies also haven’t made it any easier for Latin countries to climb up the value chain. It puts a 3 percent tariff on soybeans — a leading Latin American export — but a 9 percent tariff on higher-value soybean oil, for instance. Latin countries need to use their collective leverage to push China to open its markets. As part of that process, they should also push to expand their investments in China.
China’s policy banks, for their part, should bring their loan guidelines on environmental impact up to international standards. Xi could also win hearts and minds (and lungs) with a joint initiative on climate change, which Latin nations see as the biggest global threat.
China likes to swaddle its overseas investments in speeches about “South-South” cooperation. Never mind that China is well above the equator. Latin America should know from experience that when you’re doing business with an 800-pound gorilla, rhetoric is less useful than a solid grounding in economic reality.